Welfare capitalism, regime types and unemployment in
the OECD: How do welfare state institutions affect
labour market outcomes?
By Jon Sharvill
MAY 1, 2018
LEIDEN UNIVERSITYMSc Public Administration (Economics and Governance) Thesis supervisor M.C. Berg
Foreword
This thesis is the culmination of my Master’s Degree in Public Administration at the University of
Leiden. When deciding upon the subject matter for this research, I decided to formulate an
approach that would incorporate elements of the two courses that I found the most enjoyable
and interesting during my degree course – Welfare State Economics and Political Economy in an
International Perspective.
It was motivated partly by something that had continued to interest me since the 2008 global
financial crisis, the ensuing recessions across much of the economically advanced world and the
large-scale unemployment that occurred as a result, which was the role that states themselves
and the policy decisions they make have in influencing the level of unemployment in society.
Although initially it was not a subject that I was particularly familiar with from a theoretical or
academic standpoint, throughout the course of my research I have managed to develop a much
deeper understanding of the unemployment institutions of the welfare state and the how these
institutions can influence the behaviour of individuals, which I hope will stand me in good stead
for a future career in public policy.
I am grateful to all of my lecturers at Leiden University for broadening my knowledge of economics
and governance issues in a way that was both enjoyable and stimulated critical thought, and
especially to my thesis supervisor Maarten Berg for his guidance and advice throughout the whole
research project.
Contents
1. Introduction1.2 Historical Overview 1.3 Government Intervention A. For Macroeconomic Adjustment B. To Correct Market Failure C. Trade-offs
D. Government Failure
2. Aims of the Research
2.1 Literature Review 2.2 Relevance
3. Welfare State Regimes
3.1 Criticisms of Welfare Regime Approach
3.2 Case Selection A. Liberal B. Conservative C. Social-Democratic D. Australasian E. Mediterranean 4. Descriptive Statistics 5. Theoretical Framework 5.1 Reservation Wage 5.2 Job Search Intensity 5.3 Unemployment Insurance 5.4 Hypotheses A. Generosity B. Duration C. Entitlement Effect D. Unemployment Trap E. Supply-Side Policies F. Labour Market Institutions G. Employee Protection Legislation
6. Data
6.1 Omitted Variable Bias 6.2 Unemployment Durations
7. Methodology 8. Results and Analysis
8.1 Replacement Rate 8.2 GDP Change 8.3 Maximum Duration 8.4 ALMP Expenditure 8.5 Union Density 8.6 Unemployment Trap 8.7 Employee Protection 8.8 Youth Unemployment 8.9 Duration of Unemployment 8.10 Robustness Checks 8.11 Testing the hypotheses
9. Conclusion 10. References
1. Introduction
The level of unemployment within a country is often seen as one of the ‘big three’ economic indicators – alongside gross domestic product and inflation – that interact and provide an overview of the general health of an economy (Graham 2018). In addition to this, the 2008 financial crisis highlighted the issue of high levels of public debt and the potential unsustainability of running budget deficits to fund public expenditures (Neaime 2015). A low unemployment rate is good for individuals and communities, in that it enables workers to demand higher wages as it is more difficult to replace them, it increases their job security and brings social and psychological benefits (Kokemuller, n.d). Moreover, more people in work means greater tax receipts for governments and reduced welfare expenditures, as well as increasing aggregate demand as more people have money to spend which fosters economic growth and innovation. As such, one of the key issues facing domestic policy makers is deciding which employment policies to enact in order to achieve the best possible labour market outcomes at the same time as achieving sustained economic growth, controlling inflation and ensuring that public debt is serviceable. However, much heterogeneity exists in the policy approaches taken by national policy makers, and these different policies create different incentives for individuals to behave in certain ways, which contributes towards the variation in these ‘big three’ economic indicators that we see between states.
The 2008 financial crisis saw many of the world’s economically advanced economies plunge into recession, leading to a sustained period of economic stagnation and widespread unemployment, with the global unemployment rate rising from 180 million in 2007 to 210 million by 2010 (IMF, 2010). In parts of Europe, the effects of the financial crisis were particularly acute, with the aggregate unemployment rate in Greece rising from 7.8% in 2008 to 27.5% by 2013, and the youth unemployment rate in Spain rising from 18.1% to 55.5% over the same time period (OECD, n.d), with potentially serious adverse consequences not just for the states in question but also for the individuals, families and communities that feel the effects of being out of work and are unable to maintain their desired lifestyles. The financial crisis raised the issue salience of unemployment – particularly in those Eurozone states in southern Europe excessively burdened by national debt and lacking monetary sovereignty - and stoked lively debate as to what the most effective policy responses are to stimulate the economy and boost the employment rate (Emmerson and Tetlow 2015).
Despite both suffering a similar sized drop in their respective gross domestic products, unemployment in the United States rose by 5% following the financial crisis, yet in France the increase was only around 1.5% (Tasci 2011). Moreover, over the last twenty years the average aggregate unemployment rate in Germany
has been just under 8%, while in Denmark that figure is around 5%, despite statistics published by the World Bank and OECD showing there being no real difference in the average GDP growth rate over the same period. This raises the question of why unemployment is seen as such a powerful indicator of an economy’s health if it is not necessarily directly linked to a country’s economic performance. The answer is that GDP growth alone tells us nothing of the distribution of the GDP and whether growth is bringing benefit to citizens in terms of greater employment opportunities and/or higher wages. To take an extreme example, the GDP per capita in oil-rich Equatorial Guinea in 2008 was $20,334, yet ‘approximately two-thirds of the population live(d) in extreme poverty’, and despite at the time having a GDP per capita higher than Italy, it would surely be folly to argue that the economy was performing well (Sapsuwan 2014). So while it is accepted that the business cycle is likely to be the biggest factor influencing the level of unemployment in a country at any given time and that ‘cyclical unemployment is usually the main cause of high unemployment’ (Amadeo 2018), the unemployment rate is an independently robust indicator of economic performance in its own right as it is difficult to see how an economy can perform at its most efficiently with vast swathes of the population not producing anything. What this paper seeks to find out is what accounts for cross-national variation in labour market outcomes once the effects of the business cycle have been controlled for. It is believed that a significant factor affecting labour market outcomes will be the particular institutions of different welfare states, in particular the institutions relating to unemployment insurance and unemployment benefits.
How generous should unemployment benefits be? How long should individuals be entitled to claim them for? Who should qualify for unemployment benefits? What actions do individuals need to take in order to continue their benefit entitlement? How much should states spend trying to get unemployed individuals into work? All of these questions remain pertinent to policy makers, yet as will be shown below, the answers look very different depending on where they are being asked and asnwered. An evidence-based approach to answering these questions is therefore crucial in order to create better government policy in the future, and in order to do that it is important to know how and to what extent welfare state institutions affect labour market outcomes. It is this that forms the motivational basis of this study, which seeks to answer the research question ‘How do welfare state institutions affect labour
market outcomes?’
1.2 Historical Overview
Government intervention in the economy – or at least the level of government intervention in the economy – has historically been at the root of much political division and remains a heated area of political contention today, with acute ideological differences between how citizens and governments believe societal welfare is best achieved (Geoghegan & Wilford 2014). Throughout the early years of capitalism, influenced by the renaissance and the political and economic thought of 18th century liberals such as Adam
Smith, the economically and industrially advanced European states adopted a laissez-faire approach to society and the economy (Evans 2004). This approach saw the allocation and disposal of resources left to rational, self-interested individuals in free-market exchanges, with the government’s only role in promoting societal welfare being to enforce property rights, as according to Smith state intervention in the economy ‘would only stifle the equalizing process of competitive exchange and create monopolies, protectionism and inefficiency’ (Esping-Anderson 1990; Landauer & Rowlands 2001). Into the early twentieth century, the unregulated capitalism of the epoch was often seen to lead towards worker exploitation, poverty, inequality, general societal discord and ‘boom and bust’ economic cycles (Rothbard 2010). This, combined with the gradual spread of proletarian enfranchisement throughout the industrial world, meant that a laissez-faire ‘nightwatchman’ state was no longer a politically viable option, which led to a general acknowledgement that governments had a role to play in offsetting the frictions apparent between capitalism and democracy (Gough 2008). Against this backdrop, and with Marx-inspired socialism gaining traction throughout Western Europe (Sassoon 2000), state intervention in certain spheres of the economy came to be seen as acceptable if it provided the function of improving the performance of markets and/or ameliorating poverty (Menon 2012). However, the direction, level and scope of this government intervention was largely shaped by ideological beliefs and domestic political processes, with sharp differences of opinion between those on opposing sides of the political spectrum on what the optimum level of interaction should be between democracy, capitalism and welfare (Marshall 1950). It was out of these domestic political processes that the nascent welfare state institutions were established, with unemployment insurance schemes beginning to emerge in western European states during the first decades of the twentieth century (Holmlund 1998).
In the advanced states of continental Europe, unemployment insurance schemes were largely modelled on Bismarck’s corporatist arrangements between industry and labour, with a ‘restricted approach (to providing insurance) derived from participation in productive activity’ (Gallie 2000). Under these arrangements, unemployment compensation was linked to the status, vocation and contributions of the
individual worker with the goal of consumption smoothing – providing workers with funds to maintain a similar standard of living outside of the market during the period of unemployment (Barr 2012).
Conversely, unemployment insurance systems based on a liberal ideological approach were established in the United Kingdom and United States. Whereas the Bismarckian welfare states had their focus on consumption smoothing, the liberal welfare states – influenced by the 1942 Beveridge Report - adopted a more residual approach focusing instead on poverty relief, offering the ‘widest approach to social protection founded on the notion of social citizenship’ (Gallie 2000; Barr 2000). Although the liberal welfare states were residual and intended as a last resort, they were still a long from the laissez-faire capitalism of the nineteenth century and the state became the last-resort guarantor that individuals would not sink into destitution.
The post-war period saw the spread of the modern welfare state across Europe and beyond, where – based on Keynes’ economic vision of a more interventionist state – states sought to promote full employment and enjoyed rapid economic growth (Esping-Anderson 1994). It was during this ‘Golden Age’ period that a further welfare state model was established. Based on Social-Democratic ideology, the mainly Scandinavian states’ welfare systems drew broadly from the Beveridge approach, however while the system in the UK was residual and aimed at providing subsistence to alleviate poverty, the focus in these Social-Democratic systems was firmly on providing welfare to society as a collective (equality) rather than to individuals in the most need (equity), with a goal of full employment and a society based on the French revolutionary principles of liberté, égalité, fraternité (Holmlund 2015; Barr 2012).
Following oil price shocks in 1973 leading to inflation and rising unemployment throughout Europe, the Golden Age of the welfare state ended in the mid-1970s in fiscal crisis, with a large welfare state and Keynesian government intervention increasingly no longer being seen as an efficient route to prosperity (Moreno 2015). However, despite this, much recent literature has highlighted the path dependency and resilience of welfare state institutions, showing that once established, these institutions tend to persevere over time (Pierson 1996). As such, the ideologies that lay behind the establishment of corporatist, liberal and Social-Democratic welfare states and their particular institutional configurations still tend to persist today, and therefore different types of welfare state remain interesting units of analysis in the field of comparative political economy research.
Today, unemployment remains one of the most important political and economic challenges facing governments, in terms of both the state’s economic performance and its societal welfare (Riffkin 2014).
Unemployment insurance schemes offer individuals peace of mind should they become involuntarily unemployed, however providing unemployment benefits to those out of work is often funded by tax contributions of those in work, and evidence exists to show how differing views on ‘self-interest, class-interest, and egalitarian values’ lead to different attitudes towards welfare recipients, with citizens in liberal welfare states much more reluctant to support welfare policy than those in social-democratic welfare states, for instance (Larsen 2008). Societal cleavages between those in work and those in receipt of benefits have the potential to lead to both stigmatisation and social exclusion, with the term ‘scroungers’ regularly appearing on the front pages of the tabloid press in the UK to refer to those out of work (Martin 2010). Therefore it is essential that policy makers are equipped with enough information that they can make the best policies possible in order to promote employment, protect individual welfare and maintain social cohesion.
1.3 Government Intervention
A. Intervention for macroeconomic adjustment
While a large body of literature exists relating to the role interest groups - notably trade unions and partisan political parties – have played and continue to play in the creation and operation of the welfare state (Starke 2006; Allan and Scruggs 2004), the focus of this paper is on the welfare states’ economic rather than political or social functioning. The issue of unemployment raises a number of economic implications for policy makers to address. The post-war example of the command economies of the Soviet Union show that full employment in its truest sense is an achievable goal, should it be so desired. However, under a capitalist economic system, full employment in the sense of everyone that is physically able to work is actively employed is generally not a desired goal. Some frictional unemployment may be preferable as people move into alternative employment that better matches their ability and is therefore more productive (Moffatt 2018). In addition, if every single person that can work is already in work, it becomes much more difficult for employers to create and fill vacancies as there is no pool of available workers, which could potentially stunt further growth (O’Keefe and Rapp 2017). A lack of unemployed workers available to replace existing workers also leads to increased worker bargaining power and thus higher wages under the threat of industrial action, which in turn increases aggregate consumer demand and drives up market prices, which leads to inflation (Parkin and King 1995). While this may not have been a pressing concern in the Soviet command economies with centralised price and wage controls, in the economically advanced capitalist economies inflation leads to a ‘decline in relative competitiveness’, exchange rate depreciation and an erosion of the value of savings, and the consensus among
policy-makers is that high levels of inflation should be avoided and intervention in the economy in respect of avoiding this is appropriate (Pettinger 2016). Therefore, when policy makers in welfare states decide on their policies towards the unemployed, they face a trade-off between maintaining high levels of employment at the same time as keeping inflation under control, which is why the term ‘full employment’ is understood not to mean full employment, but an unemployment rate that does not create inflationary pressure, which in the US is accepted as being around 5% (Crook 2018).
B. Intervention to correct market failure
As mentioned above, unemployment can ‘bring about a sharp drop in living standards, a weakening of social life, and marginalization with respect to those in work – effects which can become cumulative and lead to a situation of intense poverty and, at the least, of social rupture’ (Gallie and Paugam 2000). Therefore, insuring against the risk of losing one’s job can provide consumption smoothing and is likely to be utility enhancing for risk averse individuals – indeed ‘the fundamental rationale for unemployment insurance is to provide income insurance for risk-averse workers’ (Holmlund 2015; Tversky and Kahneman 1981). Despite ideological objections from some scholars of the libertarian persuasion who believe the role of government should be strictly limited to enforcing property rights (Nozick 1974), there is general agreement regardless of partisan political preferences that governments have a role to play in correcting market failures (Barr 2012). In the case of unemployment, market failure occurs in the provision of unemployment insurance due largely to information asymmetries between insurance providers and those wishing to be insured. Adverse selection means that the insurer has no way of knowing information such as the attitude and work ethic of the individual seeking insurance, and thus has no way of knowing if they are a greater or smaller risk of becoming involuntarily unemployed. More importantly, moral hazard means that once an individual has become insured, they are able to act in ways that can impact upon their entry to or exit from the workforce (Barr 2012). In addition to this, unemployment is not always an individual risk, but rather a common shock with correlated risk. Drawing on classic Keynesian theory, unemployment means individuals have less money to spend and therefore have less demand for goods and services. Less demand for goods and services means less demand for workers, which in turn leads to further unemployment. Therefore, due to problems with information asymmetry and correlated risk, unemployment is seen as an uninsurable risk and policies are not offered in private insurance markets despite there being existing demand, leading to market failure due to a missing market, and a need for government intervention (Barr 2012).
In addition to the trade-off between unemployment and inflation, policy makers in different states also face a number of other trade-offs that influence the design of welfare state institutions and can have an effect on labour market outcomes.
Consumption smoothing v efficiency: Unemployment insurance provides an income for those not involved in market activity. However, a greater level of income through insurance means individuals are able to maintain an acceptable standard of living away from the market, meaning they may by less likely to re-enter the workforce which will lead to a reduction in a state’s productive efficiency (Barr 2012).
Higher benefits v Higher contributions: Unemployment benefits are generally funded by individual contributions, either through compulsory insurance payments (with the exception of some Scandinavian welfare regimes based on the voluntary ‘Ghent’ system of social insurance) or through general taxation (Holmlund 2015). Therefore generous benefits that contribute to a greater degree of consumption smoothing come at the cost of a larger tax burden, and it is this trade-off that lies at the heart of many of the institutional differences between different types of welfare states (Morel 2012).
Market v State: The role of the market and the role of the state in providing social welfare has been a cleavage that remains prevalent in welfare state regimes. Increased taxation and public spending means that the economic activity of the state can reduce the level of economic activity in private markets, and vice versa (Sanandaji 2012). In the mixed economies that typify all welfare states within the OECD this trade-off is again highly influential in determining the design of welfare state institutions and is likely to have an influence on labour market outcomes.
Budgetary restraint v inequality v employment growth: Despite intuitively seeming to be goals of most liberal democracies, analysis by Iverson and Wren (1998) found that it is only ever possible for contemporary welfare states to satisfy any two of these three goals at a given time, and that the two goals policy-makers choose largely to conforms to the type of welfare state regime that exists within each state. Figure (1) below shows how neoliberal-based models (which broadly conform to liberal welfare regimes) focus on fiscal discipline and employment growth, social-democratic models and welfare regimes focus on earnings equality and employment growth, while Christian-democratic models (which broadly conform to corporatist welfare regimes) focus on earnings equality and fiscal discipline. The pursuit of a particular two goals at the expense of another is again likely to have an influence on labour market outcomes within each state.
Figure (1) – The trilemma of the service economy1
D. Government failure
While market failure in the provision of unemployment insurance can create a need for governments to intervene in the economy, how governments decide to respond and the actions they take can lead to very different labour market outcomes. As noted above, welfare policies that are overly generous may help unemployed individuals in terms of consumption smoothing, but they are expensive and may result in the economy not reaching its most efficient productive possibility as people are disincentivized to work due to the high tax burden (Mankiw 2010). Moreover, generous unemployment benefits may disincentivise individuals to return to work or encourage them to exit work, again leading to a sub-optimal employment outcome (Messacar 2014). Broadly speaking, government interventions in the economy that do not reduce economic inefficiency or ‘deadweight loss’ (or at least produce a more welfare-enhancing outcome than the alternative of non-intervention) can be termed ‘government failure’ (Winston 2006). The concept of government failure has taken on prominence over recent decades and has been used by those on the right of the political spectrum to criticize social expenditures they believe to be an inefficient and undesirable allocation of resources (Keech and Munger 2015). While there is no normative objective measure of what constitutes a ‘good’ outcome – different welfare regimes have different social and
1 Iversen, T. Wren, A. Equality, employment and budgetary restraint: The trilemma of the service economy. World
economic priorities – the concept of government failure may be useful in explaining the apparent success, failure, or differing outcomes of different welfare state policies.
2. Aims of the Research
The aim of the research is to try and find out why labour market outcomes differ across states, and particularly how different welfare state institutions influence these outcomes. Looking at the divergent paths of East and West Germany, North and South Korea, or more contemporarily Slovakia and the Czech Republic, it is clear that institutions – the ‘rules of the game’ that constrain the agency of affected stakeholders (North 1991) – play an important role in determining economic outcomes. Indeed, in their classic 2012 work ‘Why Nations Fail’, Acemoglu and Robinson consider the different political and institutional choices politicians make to be the crucial determinants behind whether states prosper or struggle. More specifically, and taking a behavioural-economic approach to the research, the paper seeks to explore how individuals respond to the incentives (or disincentives) provided by particular welfare state institutions in terms of their labour market behaviour. The paper seeks to explore what effect different combinations of welfare institutions have on employment outcomes – do individuals respond better to the level of benefit generosity or the strictness of the eligibility criteria? For example, if benefits are too high, does this mean people will abuse the system and make no effort to find work? Moreover, if benefits are not generous enough and people struggle to survive, does this make them try harder to find work? In terms of unemployment the rate may well be lower if there were no benefits at all as individuals would be forced into accepting any job under any terms and conditions in order to survive, but as this is not a feasible political option states have to decide at what level and under what criteria to set benefits, and this research seeks to find out what effect these choices have on the labour market. However, the level of benefits is not the only question policy-makers need to consider, there are also other institutional decisions that must be made that it is also believed can affect labour market outcomes. Do active labour market policies contribute to a reduction in unemployment? Do unions play a role in the rate of unemployment? What welfare institutions are effective in transitioning the unemployed into the work force quickly, and what institutions lead to longer periods of unemployment? These are some of the questions this study seeks to answer, and once the answers have been established, policy-makers can use this information when deciding how to better design the welfare state institutions relating to unemployment as part of their overall employment strategy. For example, they must decide how generous unemployment insurance should be. They must decide how much to tax to levy on people
entering employment. They must decide on how much to spend trying to return people to work. They must decide how much legal protection employees should be entitled to. The research aims to find out how the choices that policy-makers make regarding these issues affect labour market outcomes, and how effective the chosen institutions are in achieving their desired goals. Further to this, the paper aims to discover whether the effects of different welfare state institutions on labour market outcomes are uniform across all types of welfare state or whether there is any significant variation between different types of welfare state, as categorised below in section 3 below.
The research aims to show which welfare institutions – or more specifically the welfare institutions pertaining to employment and unemployment - are effective (or not) in achieving desired labour market outcomes, as ‘properly designed unemployment benefits improve the allocation of human capital and thus foster economic growth’ (Barr 2012), a key goal of much government economic intervention. Once it has been established which institutions are most effective, policy-makers are able to design better institutional configurations and policies in the future. This takes on extra contemporary significance given the establishment of nascent welfare states in Eastern Europe, East Asia and Latin America that do not have the historical ideological traditions and path dependencies of the fully established welfare states of Europe, North America and Australasia. As noted by Sjoberg (2010) ‘it is unlikely that economic globalization will be either politically acceptable or economically efficient without adequate unemployment insurance in the fast-growing economies of Asia and Latin America’.
The research can also be useful in informing policy-makers seeking to reform current welfare state institutions. Much has been made of the impact that the financial crisis of 2008 had on welfare state institutions in terms of austerity politics and retrenchment (van Kersbergen, Vis and Hemerijck 2014), however with much of the dust from that crisis having now settled, comparative political economy research such as this can analyse whether the structural changes to welfare state institutions made in response to the crisis have been effective in achieving desired labour market outcomes – and once this has been established the information can be used should states wish to reform their welfare state institutions so that they operate more efficiently.
2.2 Literature Review
An extremely large body of literature exists relating to unemployment – its causes (Dumas 1986), its solutions (Keynes 1936; Friedman 1977), its costs (Feldstein 1977) and its economic consequences (Gaelle 2000). In terms of unemployment institutions specifically, while again the existing literature is broad, the results are far from conclusive and ‘competing research exists on the importance of welfare regimes in
explaining differences in… labour market status’ (Hussain, Kangas and Kvist 2012). This section will give a brief overview of some of the existing research on the effects welfare institutions concerning unemployment insurance and benefits have on labour market outcomes.
One major strand of research on the subject concerns how the generosity of unemployment benefits affects the unemployment rate, and the classic body of work in this field comes from the 1980s. A large study by Johnson and Layard (1986) found that benefit generosity was positively correlated with the aggregate unemployment rate, meaning that the more generous benefits are, the more people choose not to work. Indeed, the study concluded that it was benefit generosity – specifically in terms of the replacement rate- that was the crucial determinant in explaining the aggregate unemployment rate once the natural business cycle had been controlled for. Layard followed this up with a further large-scale study in collaboration with Nickell and Jackman (1991) which reinforced the initial findings, although the strength of the effect was found to be marginally smaller in the latter study. Similar studies by Reilly (2015) and Krueger and Mueller (2009) also found that benefit generosity and unemployment were positively correlated, with the latter study stating that ‘job search is inversely related to the generosity of unemployment benefits, with an elasticity between 1.6 and 2.2’. Further support for this theory comes from Filiz (2017), whose study on Turkey also found that more generous unemployment benefits lead to a lessened probability of transitioning to employment, and this effect in Turkey is actually greater compared to the more economically advanced OECD countries that are the subject of this paper. A study adopting a similar methodology to this research paper by Ding (2014) used panel data from 1980-2010 across 34 OECD countries, and found a statistically significant positive relationship between welfare expenditure and aggregate unemployment, although Ding’s research differs in that unemployment welfare generosity was conceptualized as social expenditures as a percentage of GDP, which has recently been criticised by Amine (2016) for potentially leading towards incorrect conclusions from the data as it is unknown how these social expenditures are spent and how many people actually benefit from them. However, contrary to these findings, another classic study by Mortensen (1977) found evidence suggesting that in some instances the opposite is actually true, and generous unemployment benefits actually incentivize those out of work but not in receipt of insurance to transition into employment so that they would qualify for future benefits, and therefore increased benefit generosity sometimes leads to decreased unemployment. In general, most research finds that where it does exist, the actual size of the effect benefit generosity has on unemployment does not tend to be very large. A review of the existing literature by Barr (2012) determined that ‘the hypothesis that unemployment benefits exert a substantial
upward effect on the level of unemployment receives only limited empirical support’, and a further critical review by Howell, Baker, Glyn and Schmitt (2007) also cast further doubts on the robustness of these theories, instead concluding that ‘the evidence is consistent with a more complex reality in which a variety of labour market models can be consistent with good employment performance’.
A second strand of research focuses on how the duration that individuals are able to claim unemployment benefit for affects the unemployment rate. Filiz (2017) used a regression discontinuity analysis around the cut off for benefit exhaustion to find a small but significant correlation between the duration of unemployment benefits and the length of time spent out of the labour force, while Kreuger and Mueller’s (2009) research on the United States found evidence that job search intensity (see section 5.2 below) is negatively correlated with the generosity of unemployment benefits, and job search intensity increases as individuals get close to the point of benefit exhaustion. Furthermore, Vodopivec (1995) found that in Slovenia shortly after the breakup of the Soviet Union recipients of unemployment benefits tended to remain unemployed up to the point of benefit exhaustion before taking a job, and that shortening the duration of unemployment benefits shortens the period of unemployment, a finding also advanced by Mortensen (1977).
There are also a number of other factors that studies have shown to be causal influences behind the unemployment rate. Bloom and Michalopoulous’s (2001) wide-ranging research in the United States examined how a number of different welfare and work policies affect employment, finding that the most important factor in transitioning into employment was active labour market policies such as education and training. Alternatively, a recent paper by Rueda (2015) suggests that, rather than pecuniary unemployment policies being the driver behind labour market outcomes, instead it is the strictness of the eligibility criteria that is key, as it ‘restrict(s) access to social benefits and push(es) those receiving them into the labour market, often through filling the least well-paid and protected jobs’.
In terms of welfare state regimes themselves, which form a significant part of the approach of this paper, the literature is reviewed in greater depth in section 3 below. However, in terms of the effect different welfare regimes have specifically on labour market outcomes the literature is much sparser. While adopting a welfare regime approach, Ngai and Pissarides (2008) examined the effect different welfare states had on employment outcomes, and found that Anglo-Saxon (liberal) regimes encouraged more overall market employment than Scandinavian (social-democratic) regimes. A book by Gallie and Paugum (2000) collated one of the largest bodies of research on welfare regimes and how they affect labour markets, finding largely mixed results depending on the dependent variable in question, although they
conclude that welfare institutions do appear to have an influence on unemployment rates, and this influence is different in different welfare regime types.
2.3 Relevance
This research project is relevant for a number of reasons. Firstly, due to the inconclusive and sometimes contradictory nature of much of the research, there is currently no absolute consensus on the effect welfare state institutions have on labour market outcomes, and therefore further research is necessary to try and establish exactly why, how, and to what extent the two concepts are related.
Secondly, as noted above, although a large body of literature exists concerning welfare state regimes on the one hand and the effect of welfare institutions on labour market outcomes on the other, these strands of research tend to operate in isolation and there have been few studies that combine both strands of research. By taking a welfare state regime approach the research focuses not just on the aggregate effects of individual institutions on a particular outcome but also on how particular welfare institutions work differently in different environments and in different overall institutional configurations. This is important, as particular institutions do not work in isolation. It is not just benefit generosity or just the length of benefit entitlement that causes particular labour market outcomes, but rather they are contributory parts of an overarching unemployment policy – as ‘unemployment benefits affect labour force participation, employment, and unemployment via a variety of channels that involve interactions with other institutions’ (Boeri 2008). So while there is some existing research that uses welfare state regimes as the independent variable, it is an approach that as yet has not received a huge amount of attention, and especially so with regards to unemployment.
Thirdly, much of the research published in this field has tended to take a micro approach and uses time-series data within a single country (Kruegar and Mueller 2009; Amine 2016). While the findings of this research is obviously of relevance to the countries in question, it is unknown whether there are endogenous factors influencing the results in those countries that perhaps may not apply externally, therefore a question mark may hang over the generalisability of any findings. Using cross-country panel data means that this research can better gauge the overall effects of different institutions as it reduces the likelihood of there being any endogenous causes of any phenomena that is discovered, which may not be the case in research that solely focuses on one state.
Fourthly, much of the classic research in this field occurred in light of the end of the ‘Golden Age’ of the welfare state and a general withdrawal away from Keynesian interventions in the economy (Holmlund
1998), with much of the most often cited research in the field tending to come from a period before the global financial crisis beginning in 2008. However, research suggests that both the crisis (Van Kersbergen, Vis and Hemerijck 2014) and the effects of globalization more generally (Kwon and Pontusson 2010) have both had substantial effects on both welfare state institutions and labour market outcomes. Therefore this research is relevant in that it incorporates data from both before and after the 2008 crisis so that it can be seen whether the theories and conclusions made before the crisis still hold now in light of these contemporary changes in the structure of the global economy.
Finally, the research is relevant in that it will test whether existing theories still hold when using an alternative dataset and alternative time-period to existing research. Moreover, due to the inconclusive nature of existing research in the field, it is clear that theories in the field are not yet as robust as they could be. It is unclear, for example whether the effect of unemployment benefit is generally weak and of limited importance, or whether the different welfare institutions cancel each other out through push and pull mechanisms. For example, generous benefits may incentivise individuals not to transition to employment, yet at the same time a very strict monitoring and sanction programme may have the opposite effect. Therefore, and especially so in light of the paucity of research from a welfare state regime angle, this research can also be used in a theory-generating capacity to possibly come up with alternative theories that better explain why certain welfare state institutions lead to particular labour market outcomes in different welfare regimes.
3. Welfare state regimes
This research is focused on how welfare state institutions interact and affect labour market outcomes, in aggregate across all states, but also as a comparison between particular welfare state regimes. As such, it requires a typology of welfare regimes from which comparisons can be made. The concept of ‘welfare state regimes’ was introduced in Esping-Anderson’s (1990) seminal publication ‘Three Worlds of Welfare
Capitalism’, and these have since been ‘embraced by literally hundreds of studies in comparative social
policy and comparative political economy’ (Scruggs and Allan 2006). Welfare state regimes are ‘a system of public regulation that is concerned to assure the protection of individuals and to maintain social cohesion by intervening, through both legal measures and the distribution of resources, in the economic, domestic, and community spheres’ (Gallie 2000). Welfare regime typologies reflect the particular mix of markets, the state, and family in the provision of welfare that is found within different societies (Scruggs
and Allen 2006), with Esping-Anderson categorising welfare states using cluster analysis according to the degree of de-commodification and the degree of social stratification prevalent in each type of welfare state, and it is this classification that will also be used in this study. De-commodification – the extent to which individuals are able to maintain a livelihood without relying on the market - is used as a proxy for the overall generosity of the welfare state. Social stratification ‘refers to differential access to resources, power, autonomy, and status across social groups’ (McLeod and Nonnemaker (1999). In short, social stratification is seen as a measure of social equality within society. Categorising welfare states on the basis of this criteria, Esping-Anderson created a typology of three welfare state regimes – liberal, conservative and social-democratic.
Liberal welfare regimes: Esping-Anderson categorized these welfare state regime as those whose institutions were borne out of the liberal political tradition. These institutions are largely based upon means-tested assistance, meaning only those who do not have the means to support themselves receive state assistance, with only quite modest universal transfers and social insurance plans. Benefits are designed to cater mainly to those on low incomes who are dependent on the state for their livelihoods. Entitlement rules in these regimes are typically strict and often stigmatizing, despite the relatively modest level of benefits, meaning that those in receipt of welfare benefits are viewed negatively by other parts of society. These regimes see the market rather than the state or the family as the best source of providing societal welfare, and as such there are minimal levels of de-commodification and a moderate level of social stratification (Esping-Anderson 1990).
Conservative welfare regimes: These regimes originated out of the Bismarckian tradition, where the governmental focus on efficiency and commodification were never as prevalent as in liberal states. The underlying rationale in these regimes in terms of providing welfare is the ‘preservation of status differentials’ – welfare rights are linked to the class, occupation and status of the recipients, and as such these regimes are characterized by a high degree of social stratification. These regimes have few redistributive properties and have been historically shaped by Catholicism, corporatism and traditional values of familialism, and are typically more generous than liberal regimes with a moderate level of de-commodification (Esping-Anderson 1990). In short, benefits are generally awarded in line with the recipient’s status and previous income rather than on the basis of actual need or on the basis of societal equality. It is important to note, however, that welfare state regime types tend to be enduring and somewhat independent of the partisan political preferences of whoever a state’s governing party is at any given time (Kersbergen 2002), and it is quite possible for two states with a similar institutional welfare
structure to adopt quite different public policies, especially concerning fiscal responses to exogenous shocks. To emphasise, the policy responses to the financial crisis of 2008 of the French and German governments were quite dissimilar, with the French government much less fiscally disciplined and adopting a looser monetary policy (Bozio et al 2015). However, in terms of the level of de-commodification and social stratification they remained remarkably similar, giving further support to Pierson’s (1996) concept of welfare state resilience once institutions have been established.
Social-Democratic regimes: It is this type of regime that is commonly found in the Scandinavian welfare states. The regime is based on the concepts of universalism and social solidarity, leading to low levels of social stratification due to the high levels of fiscal redistribution. Benefits also tend to be awarded on the basis of equality, rather than simply to relieve poverty amongst the poorest in society as in Liberal regimes. The state typically ‘crowds out’ the market and is seen as the driver for providing societal welfare. These welfare state regimes typically have high levels of benefit for those in receipt of welfare, therefore they have high levels of de-commodification (Esping-Anderson 1990).
3.1 Welfare regime criticisms
Using a welfare state regime approach can be beneficial in terms of its conceptual clarity, yet the efficacy of doing so has not been universally accepted by all academics. While some authors contend that ‘popular regime typologies have degenerated as a research programme, notwithstanding their many achievements’ (Schelkle 2012), others still maintain that ‘a regime approach is useful in comparative analyses of welfare sates in order to conceptualise distinct typologies in which to classify empirical similarities and differences’ (Ebbinghaus 2012). The welfare regime typology approach draws heavily from Weber’s sociological concept of ‘ideal types’, which do not necessarily capture every single characteristic of each case in a specific type, but as Weber himself stated, offer a ‘synthesis of a great many diffuse, discrete, more or less present and occasionally absent concrete individual phenomena, which are arranged according to those onesidedly emphasized viewpoints into a unified analytical construct’ (Kalberg 2016). Therefore, while the welfare states of, for example, Denmark and Sweden may not be identical, they have enough characteristics in common that they are analytically distinct from the welfare states of, say, Spain or Germany, and can be grouped as a single regime type for the purposes of the research. Problems can arise, however, if the categorisation of these ideal types are not sufficiently analytically dissimilar, resulting in large areas of overlap and an abundance of hybrid cases that could
arguably be placed in more than one ideal type. This criticism has been laid at the tripartite classification in Three Worlds by Shelkle (2012), whose analysis two decades after its original publication saw it showing ‘signs of a Kuhnian paradigm crisis where empirical anomalies abound and require ever more ad hoc explanations’. This perhaps is not surprising given that Esping-Anderson himself acknowledged that his typology was not ‘static’ and open to future revision based on the ever changing nature of both domestic and international politics (Esping-Anderson 1990). To address this, this study has amended the typology in Three Worlds to reflect criticisms of Esping-Anderson’s work and also to reflect current academic consensus on the subject.
The first common criticism of Esping-Anderson’s typology is that its tripartite classification is too limiting, and omits alternative types of welfare regimes that are empirically distinct from the three in Three Worlds (Arts and Gelissen 2010). Notably, various scholars have called for a separate southern European / Mediterranean regime due to the residual nature of their welfare states, and the ‘especially strong emphasis on familial support, a direct legacy of the age-old Catholic subsidiarity principle’, as well as the low level of state intervention in the provision of welfare (Gallie and Paugam 2004; Art and Gelissen 2010). Although Esping-Anderson argued that the Mediterranean welfare states were just immature or undeveloped Conservative regimes, more recent research from Ferrera (1996) argues convincingly that, for the reasons stated above, they should be seen as distinct and separate units of analysis.
Another criticism is Esping-Anderson’s categorization of the states of New Zealand and Australia as belonging to the Liberal welfare regime type (Arts and Gelissen 2010). Although there are similarities with the Liberal model, stemming largely from the same ideological approach to welfare and capitalism commonly found among the Anglo-Saxon states, there are unique institutional differences between the two regimes. Acknowledging that New Zealand’s and Australia’s welfare states share with other Liberal welfare states a marginal commitment to the state being the main provider of public welfare and a shared commitment to means-testing to determine benefit eligibility, distinction arises due to the high thresholds for that eligibility meaning that large parts of the population receive welfare benefit, and redistribution is generally achieved through industry bargaining rather than through social programs (Arts and Gelissen 2010). Based on this, figure (2) outlines the typology that will be used in this research. While acknowledging that both the typology and the cases attributed to each category are somewhat subjective and open to alternative interpretations, they are in broad consensus with much of the findings in Isakjee’s (2017) recent literature on the subject of welfare state regimes.
Figure (2) – Welfare state regime typology
Liberal Beveridge principle
Focus on markets to provide welfare Low de-commodification
Mixed social stratification
Conservative Bismarck principle
Focus on both markets and the state to provide welfare Mixed de-commodification
High social stratification Social-democratic Focus on universalism
Beveridge-based principle High de-commodification Low social stratification
Mediterranean Focus on the family to provide welfare Bismarck-based principle
Low de-commodification Mixed social stratification
Undeveloped welfare institutions
Australasia Focus on industry not state re-distribution Mixed de-commodification
Beveridge principle
Full emphasis on means-testing Mixed social stratification
3.2 Case Selection
Just as no full academic consensus exists on the ‘correct’ typology of welfare state regimes, the cases that best represent each regime type are also open to a considerable degree of subjectivity, with different comparative studies often placing the same country into a different regime type depending on which criteria was used to determine that regime type (Arts and Gelissen 2010). For example, while Kangas (1994) – and the vast majority of comparative welfare state regime researchers – place Austria in the Conservative category, Powell and Barrientos (2004) instead determined that Austria was in fact typical of the Liberal regime type. As explained above, it is recognized that welfare state regimes are ideal types rather than exact descriptions of the institutional structure of the welfare states that are representative of each category, and as such the particular cases in this research have been chosen on the basis that they are much closer to one particular ideal type than any of the others, while at the same time attempting to avoid selecting hybrid cases that can plausibly be placed into a number of different categories.
As mentioned above, Liberal welfare regimes grew out of an Anglo-Saxon tradition that places emphasis on the market rather than the state in the provision of welfare (Esping-Anderson 1990). As such, the cases chosen for this study are the United Kingdom, the United States, Canada and Ireland. The United States appears to be the archetypal case in this regime, with some commentators noting a distrust of government intervention of any sort among some sectors of society (Parry 2011). This is not to say that governments are particularly small in these regimes, and all of them are enormous in comparison with the size of governments in the laissez-faire epoch of the nineteenth century, however there is much more widespread belief compared to other regime types that it is not the duty of the state to excessively intervene in the economy in pursuit of welfare provision (Rowley 1996). In a literature review of ten comparative political economy studies based on welfare state regime typologies, Arts and Gelissen (2010) found that all ten placed the United States into the Liberal regime type. The same applies too to Canada, which nine of the ten studies in the same article also agreed is typical of the Liberal regime type. The United Kingdom differs in some respect from the cases of Canada and the United States in that there is a greater emphasis on means-testing, however welfare is still provided more as a last resort to alleviate poverty rather than in order to allow individuals to maintain their lifestyle outside of the market (Ferragina and Saleeib-Kaiser 2011). The case of Ireland is slightly more open to question, mainly due to its tradition of Catholicism that has been claimed to be a significant influence in some welfare states throughout Europe (Arts and Gelissen 2010), and studies by Scruggs and Allan (2006) and Bambra (2006) have placed Ireland in the Conservative category on the basis of this. However, in agreement with Sain-Arnaud and Bernard (2003), Powell and Barrientos (2004), Castles and Obinger (2008) and Schroder (2009), this study places Ireland’s welfare state in the Liberal category due to its low level of de-commodification and mixed level of social stratification (Esping-Anderson 1990), while accepting that this case may not be as clear cut as the other cases.
B. Conservative welfare state regimes
Conservative welfare state regimes are typically found in the countries of western continental Europe having grown out of the Bismarckian welfare state tradition (Esping-Anderson 1990). The cases chosen for this study are Germany, France, Austria and the Netherlands. Germany, France and Austria all have high levels of social stratification, with the level of welfare benefits tied to the level of previous contributions, based on a close link between workers, industry and the state (Esping-Anderson 1990). As such, in Arts and Gelissen’s (2010) review of ten welfare state regime studies there is almost full consensus that these three countries all belong to the Conservative category, with the only real deviation to this
coming from Powell and Barrientos (2004), who instead considered Austria to be part of the Liberal category. As per the discussion above, it is important to make a distinction between the underlying institutional structure of the welfare state in terms of the level of de-commodification social stratification on the one hand and the chosen policy responses to a particular phenomenon on the other. This is why Austria, Germany and France have all been grouped in the same category despite their different approaches to the 2008 financial crisis. However, the case of Netherlands is much less clear cut and open to alternative interpretations, depending on how the welfare state regime is being categorized (Arts and Gelissen 2010). This is because the Netherlands could be considered as something of a hybrid, with some welfare state institutions appearing to more closely resemble the Conservative type, and others resembling the Social-Democratic model. As such, while Kangas (1994), Sain-Arnaud and Bernard (2003), and Schroder (2009) all place the Netherlands in the Conservative category, Powell and Barrientos (2004), Bambra (2006), and Castles and Obinger (2008) instead consider the Netherlands to be a Social-Democratic regime. The main reason for the differing views lies largely in the fact that the level of de-commodification in the Netherlands has traditionally been higher than in the other Conservative states and more closely resembles that of Social-Democratic regimes, yet in terms of social stratification it much more closely resembles the Conservative regimes. As noted by Goodin and Smitsman (2007), ‘the Dutch welfare regime looks very different depending upon which basis for classification is used’. The primary reason for including the Netherlands in the Conservative rather than Social-Democratic category is that while the institutions that determine the level of social stratification in the welfare states do not appear to have changed significantly over time, the institutions concerning the level of de-commodification have been reformed and empirical evidence shows considerable welfare state retrenchment in the Netherlands (Green-Pedersen 2007). Therefore, while still typically more generous than welfare states in other Conservative regimes, it appears to more closely resemble them than it does the Social-Democratic regimes.
C. Social-democratic welfare regimes
The social-democratic regimes are those typically found in the Scandinavian countries. In this study the cases chosen in this category are Denmark, Sweden, Norway and Finland. The first three countries all very closely resemble both the ideal type as categorized by Esping-Anderson (1990) and there appears to be something of an academic consensus that these three states belong in the social -democratic category – in Arts and Gelissen’s (2010) literature review all ten welfare regime studies reviewed included all three countries as Social-Democratic in their analysis. The case of Finland as a Social-Democratic welfare regime
has, however, been challenged by some authors. While Kangas (1994), Schroder (2009), and Sain-Arnaud and Bernard (2003) all consider Finland to be a Social-Democratic regime, Ragin (1994), Bramba (2006), and Scruggs and Allan (2006) all place them in the Conservative category. This is largely due to the relatively low level of generosity in terms of unemployment benefits (although sickness and pension benefits remained high) compared to the other countries found in the Social-Democratic category. For this study, it has been included in the Social-Democratic category because according to data from the OECD database the Finnish welfare state has become significantly more generous than when the studies placing them in the conservative category were published, with the level of social stratification remaining low throughout. With this in mind, Finland currently appears to more closely resemble the Social-Democratic than the Conservative regime type, and has been included in this category.
E. Australasian welfare regimes
The Australasian welfare state regimes are, unsurprisingly, those welfare states that are found in Australasia – Australia and New Zealand. Due to their Anglo-Saxon history, there are some similarities between these regimes and the other Liberal regimes that originated out of the political and economic culture of the United Kingdom – indeed studies by Sain-Arnaud and Bernard (2003), Bambra (2006) and Scruggs and Allan (2006) all placed both Australia and New Zealand’s welfare states into the Liberal category. However, of the ten welfare state regimes analysed by Arts and Gelissen (2010), these were the only three studies that did so. Having included an Australasian category for the reasons stated above – the high number of welfare recipients, the extensive use of means-testing, and the ptax fiscal re-distribution - it is logical to consider Australia and New Zealand as being part of this separate category rather than as being typical of the Liberal regime type.
F. Mediterranean welfare regimes
These regimes are those generally found on the Mediterranean coasts of southern Europe and are characterized by their residual nature, low levels of coverage and much stronger emphasis on the family to provide welfare, largely as a result of the historical influence of the Catholic church (Ferragina and Saleeib-Kaiser 2011). In this study, the cases chosen are Spain, Portugal, Italy and Greece. The most questionable case in this category is that of Italy, which Esping-Anderson (1990) considered to be part of the Conservative regime type. However, academic opinion on this is mixed, with Sain-Arnaud and Bernard (2003), Castles and Obinger (2008) and Scruggs and Allan (2006) all calling Esping-Anderson’s categorisation into question, largely on the basis that family plays a much larger part than the state in the
provision of welfare in Italy than in the other Conservative welfare states, especially in the south of the country (Simonazzi 2015). Although the level of de-commodification and social stratification in Italy has traditionally been in line with the Conservative ideal type, it is included in the Mediterranean category in this study due to quite large scale welfare state retrenchment due to IMF loan conditionalities in light of the 2008 financial crisis (Simonazzi 2015), which have limited the ability of the state to provide adequate welfare provision.
So while acknowledging that the cases chosen as being typical of each welfare regime clearly differ from each other in regards to the exact institutional structure of their welfare states, and also acknowledging that there will always be a level of subjectivity when deciding which cases to use for the analysis, it is believed that the cases chosen for this study are similarly clustered and analytically distinct enough that they will give a good approximation of each category of welfare regime.
Figure (3) - Cases
Liberal Conservative Social-Democratic Australasian Mediterranean
United States United Kingdom Canada Ireland Germany France Austria Netherlands Denmark Norway Sweden Finland Australia New Zealand Italy Spain Portugal Greece
Using a welfare regime typology means that it is neither feasible nor instructive to include some welfare states – even some that are long established – that are genuine hybrids and are not legitimately able to be placed into one single category. For instance, Belgium is considered to be typical of the Conservative type by Ragin (1994), Schroder (2009) and Vrooman (2009), yet it is placed in the Social-Democratic category by Bambra (2006), and Scruggs and Allen (2006), while Powell and Barrientos (2004) consider Belgium to have a Liberal welfare state regime. Similarly, the case of Japan also tends to split academic opinion (Arts and Gelissen 2010). As such including states like Belgium and Japan in only one category while some of their welfare state institutions perhaps more closely resemble alternative categories would
only serve to decrease the validity of the results. Moreover, there are institutions for welfare provision in the states of the former Soviet bloc and in the tiger economies of East Asia, yet due to their nascent nature it is too early to accurately determine which category they should be placed in, and they too have been omitted from the analysis.
4. Descriptive statistics
The following statistics in figures (4), (5) and (6) show the mean averages for various welfare state institutions and labour market outcomes for the years 2001 to 2016. Information is displayed for each individual welfare state regime type and the results for all cases in the base sample are shown below in italics.
Figure (4) – Welfare state institutions
Welfare regime Replacement rate (%) Unemployment trap (%) Benefit exhaustion (months) Liberal 49.8 53.75 11.75 Conservative 63.4 76.12 16.75 Social-Democratic 58.2 71.22 21.5 Australasian 25.9 42.0 60 Mediterranean 55.7 66.77 15.5 Base sample 53.4 64.19 25.1
Figure (4) shows that the average replacement rate – the percentage of the average wage a single worker can expect while out of work - across all cases in the study is 53.4 percent, although there is significant variation across different welfare state regimes. Conservative and Social-Democratic regimes have been most generous during the period under review in this study, with both these and the Mediterranean regimes typically more than twice as generous as the Australasian regimes. What is interesting to note is that in terms of replacement rates, Conservative regimes have actually tended to be even more generous than Social-Democratic regimes, contrary to a commonly held view that the Social-Democratic welfare states are the most generous (Bruenig 2017). However, as might be expected, the more generous welfare regimes also impose the highest effective tax rate (the ‘unemployment trap’) – net income from work minus the amount no longer being received in benefits - upon returning to work, with a rate of over 70 percent in the Conservative and Social-Democratic regimes compared to just 42 percent in the Australasian and 54 percent in Liberal regimes. Benefit exhaustion shows the duration that individuals are
able to claim unemployment benefits for, and again there is significant variation between regime types. While Liberal regimes on average allow recipients to claim benefits for less than one year, the duration is almost twice as long in Social-Democratic regimes, and in Australasian regimes unemployed individuals are able to claim benefits for up to five years.
Figure (5) - Welfare state labour market institutions 2001 to 2016
ALMP spending (%) Employee protection (0-100) Collective bargaining (%) Union density (%) Liberal 1.30 18.9 28.30 25.63 Conservative 2.57 51.8 84.06 20.16 Social-Democratic 2.58 46.4 82.94 65.71 Australasian 1.08 29.8 38.67 20.38 Mediterranean 2.00 58.6 76.23 23.41 Base sample 2.05 42.4 64.36 32.24
The ALMP spending table show how much on average the different regime types spend on active labour market policies as a percentage of the gross domestic product (GDP) per capita. The results show that both the Conservative and Social-Democratic regimes spend approximately double the amount spent in Liberal regimes, with Australasian regimes spending less still. The employee protection data shows the ‘synthetic indicators of the strictness of regulation on dismissals and the use of temporary contracts’ (OECD, n.d) on a scale of 1-100. As may perhaps be expected, the level of protection is much higher in the more corporatist Conservative, Mediterranean and Social-Democratic regimes, reflecting a closer three-way relationship between industry, the state and labour that is not as prevalent in Liberal or Australasian regimes (Blanton and Peksen 2016). The collective bargaining data shows ‘the ratio of employees covered by collective agreements, divided by all wage earners with right to bargaining’ (OECD, n.d), essentially showing the percentage of workers that have a right to collective bargaining, whether that right is actually exercised or not. Figure (5) shows that there are clear differences between welfare state regimes - while just over a quarter of workers in Liberal regimes are covered by such arrangements between labour and industry, that figure jumps to over three quarters of workers in Conservative, Social-Democratic and Mediterranean regimes. The final column shows the percentage of the workforce that are members of a trade union. While almost one in every three workers in Liberal regimes is typically a member of a trade union, this drops to just over one in five in Conservative and Australasian regimes, while around two in every three workers in Social-Democratic regimes is part of a trade union.
